Accrual basis and cash basis of accounting

Running head: BASIC ACCOUNTING
Basic accounting
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1BASIC ACCOUNTING
Table of Contents
Accrual basis and cash basis of accounting...............................................................................2
Example......................................................................................................................................2
Reasons of using accrual basis...................................................................................................2
Reference....................................................................................................................................3

2BASIC ACCOUNTING
Accrual basis and cash basis of accounting
The major difference among accrual basis and cash basis of accounting lies in timing
that is while purchases and sales are reported in the accounts. Cash accounting approach
reports the expenses and revenues only when the money shifts the hands. Conversely, accrual
accounting approach reports the revenues while it is earned and expenses while the bill is
generated (Jesus & Jorge, 2016).
Example
As an example I have considered Saudi Electricity Company that is an electric utility
company from Saudi. The entity is engaged in transmission, distribution and generation of
the electric power. Looking into the annual report of the company for the year closed on 2017
I have found that the company uses accrual accounting approach for reporting its revenues
and expenses. For instance, revenues from transmission system are recognized while the bills
are issued and not when the amount is received (Se.com.sa, 2019).
Reasons of using accrual basis
As per my view, the company uses accrual accounting approach as it offers better
picture for the profits of the entity during the particular period. Hence, it offers better sense of
overall financial position of the entity as compared to the cash accounting approach. Further,
the accrual basis enables the company to get immediate reflection regarding how much it is
going to receive and how much it will require paying and based on that it can make the future
plans. On the contrary, as the cash basis reports only the cash transactions, it does not report
all transactions. Further, the cash basis reports the amount when it is received irrespective of
in which period it is earned (Kieso, Weygandt & Warfield, 2016). Hence, for better
presentation and clarity Saudi Electricity Company uses accrual accounting approach.

3BASIC ACCOUNTING
Reference
Jesus, M. A., & Jorge, S. (2016). Accounting basis adjustments and deficit reliability:
Evidence from southern European countries. Revista de Contabilidad, 19(1), 77-88.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Se.com.sa. (2019). Saudi Electricity Company . Retrieved 20 February 2019, from
https://www.se.com.sa/en-us/Pages/home.aspx